06 September 2011 3:33 PM

The 'fallacious and malignant policies of Merkel and Schauble' drive the euro 'into the abyss'

I've been following the analysis of the euro by Charles Dumas of Lombard Street Research for more than six years. His notes are never less than excellent -- and over the years his analysis has been proved right time and again. Today's LSR Daily Note from Dumas is another cracker, which is why I'm going to give you some long quotes from it. Mr Dumas explains how Euroland is sleep-walking into the abyss:

At the root of this are fallacious and malignant policies of Mrs Merkel and Mr Schauble

'"Render unto Caesar that which is Caesar's and unto God that which is God's" -- words of Jesus with relevance to the euro crisis. The euro-elite has confused the monetary union and the euro -- surely Caesar's department? -- with religion.'

'The euro was adopted for reasons of political ideology and is regarded as sacrosanct by its proponents. But it is, and always has been, economically and financially indefensible, as we said from the early 1990s on, and as is now becoming clear.'

'It is not just that Euroland politicians are pig-headedly determined to avoid admitting they were and are wrong -- they also feel obliged in a quasi-religious way to defend the indefensible. But they are bound to fail.'

'In the process, policies adopted on the continent make a slump next year (if not sooner) virtually inevitable, and a prolonged depression quite likely.'

'It would be nice to compare Mrs Merkel's defiance of market forces with John Major's in 1992...but that comparison is too flattering -- hers is the stubborn folly of the sound-money men of the early 1930s. And we know where that led...'

Mr Dumas then dismembers an article by the German finance minister Schauble in this morning's Financial Times. To paraphrase Schauble, the highly indebted western democracies need to cut spending, raise taxes and liberalise 'however politically painful.' This is the austerity that the Germans are forcing on every distressed member of the eurozone.

But as Mr Dumas points out, 'the world savings rate, at an all-time high by a significant margin in 2006-07 (an underlying cause of the crisis), has risen to within a whisker of 2007's record this year.'

'Next year, the projected reduction of government deficits...will take the world savings rate into a new high ground. Yet we live in a world in which private sector savings already far exceed profitable investment opportunities in Japan and north-central Europe (Germany, Benelux, Nordics, Switzerland/Austria) -- and investment is a positively insane and unsustainable 48 percent of GDP in China.' Yet what is needed is the stimulation of consumption in the savings-glut countries.

Mr Dumas then goes on through some excellent technical stuff and shows how Greece is doomed to see its GDP 'simply slide away from under' because of the austerity forced on it by Schauble-style policies: 'Within the euro context, there is simply no solution for Greece's debt problems that will make it solvent.'

And the conclusion? 'It follows that the subsidies will have to be large and indefinitely prolonged. And this is where the political pain will come back to visit mr Schauble. Germany will have to pay.'

'Also, because the deficit countries will be in or close to recession next year, including the US and UK, both China and Germany will suffer a major loss of income, as they did in the great recession.'

'So the long-suffering German citizens will not only have to pay for the euro-elite's unremitting pursuit of its unachievable ideal, but will have to do so out of shrinking income. If people save too much, their apparent wealth has to be destroyed.'

'As history tells us, this sort of political pain can have worse consequences than a debt crisis.'

At the risk of getting out of Caesar's department, Mr Dumas: Amen to that.

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MARY ELLEN SYNON

Mary Ellen Synon is based in Brussels as a columnist at the Irish Daily Mail and contributor to the Mail on Sunday.

At other times she has worked as: a columnist at the Irish Sunday Independent and the Sunday Business Post, Ireland correspondent and later Europe correspondent at the Economist, an associate producer at CBS News 60 Minutes based in London, and a reporter for the Daily Telegraph.

Early in her career she was awarded a travelling fellowship by the Winston Churchill Memorial Trust to allow her to study the Common Market.